On 4 March 2024, the European Parliament’s Committee on
Economic and Monetary Affairs (ECON) reintroduced
the “Esther de Lange Report” from 2016.
Dutch MEP Esther
de Lange was the then rapporteur in the European Parliament (the
Parliament) for the European Commission’s (the
Commission) proposal to establish a euro area-wide
integrated deposit insurance scheme, the European Deposit Insurance
Scheme (EDIS) (the Proposal).
Following up on the Five Presidents’ Report on ‘completing
Europe’s Economic and Monetary Union’, the Commission first
tabled its EDIS Proposal in November 2015 with a view to creating
the so-called third pillar of the Banking Union. The debate on EDIS
is closely linked to the existing and reformed Deposit Guarantee
Scheme Directive (DGSD) and the Bank
Recovery and Resolution Directive (BRRD), further
prudential rules and secondary legislation adopted thereunder,
together comprises the crisis management and deposit insurance
(CMDI) framework as a comprehensive chapter under
the European Union’s (EU) Single Rulebook.
In the form of an EU Regulation, the EDIS Proposal generally
sought to amend the Banking Union’s existing Single Resolution
Mechanism (SRM) and the operation of DGSD
compliant deposit guarantee schemes (DGS) by
establishing a supranational EDIS to distribute the risk associated
with protecting depositors from local bank failures to the Banking
Union as a whole, and, thereby, to ultimately disentangle what many
commentators referred to as the bank-sovereign “doom
loop”.
The EDIS Proposal initially sought to introduce a gradual
(three-step) mutualisation of the existing funds in national DGS.
If adopted at the time, the EDIS would have, after a transitional
period of eight years, ultimately begun fully insuring national DGS
the euro area as of 2024. Fast forward to March 2024, with the
Banking Union celebrating its tenth anniversary, the third pillar
i.e., EDIS is still missing.
With political momentum on completing the Banking Union having
somewhat stagnated in recent years, the most recent market turmoil
from March 2023, as well as digital driven deposit withdrawals,
have reminded EU policymakers, co-legislators and authorities alike
how critical the establishment of EDIS is. National policymakers
including those opposed to EDIS in 2015 may also be coming around.
As alluded to in depth in a more comprehensive journal contribution
on EDIS (available here), “if Banking Union is the seat of
financial stability upon which the Eurozone rests, then having a
seat made up of at least three legs is likely to be better than
just two.” Issued in the Journal of International Banking Law
& Regulation the aforementioned article sheds light on how EDIS
aims to stop European credit institutions being “European in
life but national in death”.
Having submitted a draft Parliament legislative resolution on
the EDIS Proposal on 4 March 2024, the ECON Committee is now, under
rapporteur Othmar Karas (EPP, Austria) once again, aiming to
reiterate the Parliament’s support for EDIS by adopting the
ECON Committee compromise text reached in the previous
parliamentary term in the form of a draft Plenary Resolution. Well
aware of the previously unsuccessful discussions on completing the
Banking Union, the Parliament’s proposal on EDIS consists, as
described in further detail below, of a conceivably watered-down
rollout of EDIS as proposed in 2015.
This Client Alert provides an overview of the issues and
challenges related to the establishment of deposit insurance at EU
level since the Commission first tabled the original Proposal in
2015 and the changes underlying the bespoke Proposal now being
reintroduced for fresh consideration. While legislative reforms and
proposals have been moving forward with respect to the EU’s
CMDI framework, as covered in an earlier Client Alert, the nature
and form of introducing EDIS (also as part of the broader CMDI)
will be crucial in gathering the necessary political consensus
throughout the legislative process ahead.
Key takeaways
The question now brought back on the Parliament’s agenda,
essentially focuses on whether harmonising national DGSs would and
can suffice or if a mutualisation at European level, by introducing
a common EDIS, would be necessary. This question has been left
unanswered (at least in full) in the corridors of the
co-legislators since the establishment of the Banking Union. This
is the case despite many calls by the first two pillars of the
Banking Union, the European Central Bank (ECB),
acting at the head of the Single Supervisory Mechanism
(SSM) and the Single Resolution Board
(SRB), acting at the head of the Single Resolution
Mechanism (SRM) repeatedly arguing for EDIS to be
built to bolster financial stability and improvements to how the
DGSD and national DGS function.
Political sensitivity around this third and final pillar of the
Banking Union originates from the concept at the heart of European
integration – the very idea of risk sharing – and the
potential moral hazard attached therewith, in exchange for greater
collective stability. This is compounded by differences in opinion
across Member States with regards to sequencing. That is, how
precisely to erect the third pillar into its ultimate function of
securing the Banking Union? Some Member States believe that having
a mutual system is enough to establish credibility, while others
want to prioritise the implementation of risk-reduction measures
beforehand.
In a fully mutualised system, banks would have their risk
profiles assessed and their required contributions to a DGS
determined relative to the aggregate of banks in the Banking Union,
rather than just their domestic competitors. Where certain
Member States could potentially rely on funds from other national
DGSs to compensate their depositors without having contributed
their fair share, there is indeed a conceivable risk of moral
hazard.
This is especially true where Member States retain the authority to
utilise national legislation to shape the size and potential risks
associated with their domestic banking sector. On the flip side,
deposit insurance built on the Diamond-Dybvig model – that
is, depositors will not run on their banks as long as they believe
they will be protected – suggests that a credible deposit
insurance scheme will never actually need to pay out.
The initial Proposal, from November 2015, for the establishment
of an euro-area wide integrated EDIS which would constitute the
third (and to this day, still missing) pillar of the Banking Union,
was based on building up EDIS in three stages, that would be phased
in over eight years. Overall, EDIS would ultimately be composed of
the individual national DGSs and a European deposit insurance fund
(DIF) operated by the SRB.
Table 1: Initial Commission Proposal (November
2015)
Stage 1 re-insurance > 2020
The newly created EDIS would provide a specified amount of
liquidity assistance and absorb a specified amount of the final
loss of the national scheme in the event of pay-out or resolution
procedure.
Stage 2 co-insurance 2024
During the second stage, a national deposit guarantee scheme would
not have to be exhausted before the EDIS could be accessed. EDIS
would moreover absorb a progressively larger share of any losses
over the 4year period in the event of a pay-out or resolution
procedure.
Stage 3 full insurance 2024
In the last stage, operational as of 2024, EDIS would completely
replace the national deposit guarantee schemes and would be the
sole – integrated – deposit insurance scheme for
deposits in the euro area banks.
As the then Rapporteur for the Commission’s Proposal in the
Parliament, Dutch MEP Esther de Lange presented her draft Report
(the Report) in November 2016. A month earlier, in October 2016,
the Commission published its impact analysis, favouring a
simultaneous implementation of EDIS (risk sharing) and measures to
enhance the stability of the banking sector (risk reduction), as an
arguable compromise between the two camps in order to secure a
broad majority within the then sitting Parliament. In the Report,
however, de Lange adopted a more cautious and conditional approach
to introducing EDIS by changing the substance (to only two
implementation stages) and timeline of the Commission’s
proposal.
Specifically, according to Amendment 62 of the Report, the DIF
should be funded at national and European level with national DGSs
having to become depleted prior to making use of EU level funding.
The national DGSs would subsequently remain in existence and, as
from 2017, would have provided half of the total funds in the EDIS
with their financial means rising continuously and by 2024 have
reached the target funding level of 0.4% of covered deposits. In
parallel, the euro area-wide DIF would be set up, composed of a
combination of individual risk-based sub-funds and a collective
risk-based sub-fund providing the other half of total funds
available under EDIS. As a result, the Commission’s intention
to eliminate the significance of banks’ nationality would be
somewhat reduced.
In terms of substance and timeline, the Report advocated for
introducing the re-insurance period (see Table 1 above) only in
2019, with a second and final stage of EDIS to be introduced only
after the fulfilment of four conditions, as set out per Amendment
31, by adding a new Article 41g, namely;
- ‘the date of application, or, where relevant, the expiry of
the transposition period of the international standard for Total
Loss Absorbing Capacity (TLAC), for Global Systematically Important
Banks (G-SIBs), and of revised rules in relation to a minimum
requirement for own funds and eligible liabilities (MREL), for all
credit institutions affiliated to the participating DGSs; - the date of application, or, where relevant, the expiry of the
transposition period of an insolvency ranking for credit
institutions, harmonised at Union level, in relation to
subordinated debt; - the date of application, or, where relevant, the expiry of the
transposition period of a framework for business insolvency,
harmonised at Union level, in relation to the early restructuring
of companies in order to prevent and better handle the pressing
issue of non-performing loans; - the date of application, or, where relevant, the expiry of the
transposition period of an act amending Regulation (EU) No 565/2013
and Directive 2013/36/EU, resulting in a binding leverage ratio
requirement.
Accordingly, the re-insurance period under the Report would
start later than the Commission Proposal and last one year longer
(i.e., 2019-2023). In contrast to the Proposal, however, the
re-insurance scheme provides a ‘gradually increasing level of
liquidity support’ to participating national DGS. In other
words, where a participating DGS encounters a payout event or is
used in resolution, it may claim funding from the DIF for its
liquidity shortfall, the coverage for which increases gradually
throughout the reinsurance period;
Table 2: Reinsurance period under the Esther de
Lange Report – claimable share of liquidity shortfall
coverage by participating DGS
Year 1 reinsurance period (2019)
claimable share: 20%
Year 2 reinsurance period (2020)
claimable share: 40%
Year 3 reinsurance periodd
(2021)
claimable share: 60%
Year 4 reinsurance period (2022)
claimable share: 80%
Year 5 reinsurance period (2023)
claimable share: 100%
De Lange emphasised the importance of revamping this initial
stage, as it would provide an opportunity to advance on the issue
of risk-reduction, ‘with a credible system of reinsurance /
liquidity support already in place’.
The second and final stage – the EDIS period – would
commence starting 2024 as the ‘earliest date possible’.
Only after fulfilling the conditions under Amendment 31 of the
Report, ‘the [Commission] would be empowered to adopt a
delegated act to establish the exact date of application. In this
final stage, an increasing level of excess loss of participating
DGSs [would] be covered, achieving 100% coverage after five years.
Funding that cannot be repaid with proceeds from insolvency
proceedings does not have to be repaid.’
The Council of the European Union (the
Council), as co-legislator to the Parliament, had
conducted its initial discussion on the proposal for EDIS along
with the Commission’s communication regarding the completion of
the Banking Union back in December 2015. Subsequent progress
reports were reviewed at the conclusion of each presidency
semester, with the most recent one being in June 2019 under Romania
holding the rotating presidency of the Council. Further and
subsequent commitments to completing the Banking Union were,
however at that time less than fruitful.
Most recently, on 4 March 2024, the ECON Committee of the
Parliament reintroduced the Report with the aim to reiterate, once
again, the Parliament’s support for EDIS, by adopting the
Committee compromise – reached in the previous parliamentary term
– in the form of a draft Plenary Resolution. By adopting this
Resolution, Parliament seeks to maintain the political momentum on
EDIS which had arguably began to suffer from a certain degree of
fatigue due to limited-to-poor progress on discussions surrounding
the completion of the Banking Union.
The Parliament’s proposal on EDIS now sets out the following
aims, to some degree divergent from de Lange’s, approach:
- phasing in of EDIS in three phases; (the Resolution, however,
only addresses the first phase as proposed in the Report); - a common liquidity scheme during the first phase that could
provide loans by national DGSs via a DIF to the particular DGS in
need of liquidity; - building up the DIF over a few ears from the allocation of DGS
resources within five years; and - the Commission would prepare a report, one year upon entry into
force of the first phase, addressing whether to move on to further
stages in the phasing in of EDIS, notably including the move to a
partial (i.e., Stage 2) or a full European-level DGS and/or a
public backstop.
Whether Rapporteur Othmar Karas will be able to garner more
political consensus on EDIS than his Dutch predecessor remains to
be seen. Recent crises and the responses to, in particular the
COVID-19 pandemic orchestrated at European-level, have already
shown significant progress in regard to (centralised) policy
choices that have allowed further integration among euro area
Member States.
Specifically, the COVID-19 pandemic opened the door for common
supranational borrowing (in the form of the “temporary Support
to mitigate Unemployment Risks in an Emergency”
(SURE), the “Next Generation EU”
(NGEU) programme and the “recovery and
resilience facility” (RFF)), allowing the
Commission to provide a joint fiscal effort aligned with the
ECB’s monetary policy response for the first time, in order to
stabilise financial markets and the euro area more broadly.
Crucially, however, these programmes remain temporary in nature.
Completing the Banking Union, not to mention joint European deposit
insurance, would not be. Whether, if at all, Member States’
sentiment on vesting Brussels with further competences will require
another (deep) crisis to achieve the necessary consensus on
furthering integration, is a question EU policymakers,
co-legislators and authorities should certainly bear in mind, as it
will be their constituents to pay the price.
The ECB, for its part and cautious not to politicise the issue,
has, in its SSM role, expressed the view that the introduction of
EDIS would indeed strengthen the CMDI framework. Moreover, the ECB
underlines, that differences in national regimes for dealing with
bank failures impede complete market integration and the formation
of a uniform level of protection for the same category of
depositors (or investors) throughout the euro area and Member
States more broadly.
Similarly, the SRB has multiple times underlined that a EDIS is
indispensable to enhance financial stability, to avoid
fragmentation throughout the Banking Union as well as to overcome
the sovereign-bank doom loop. The SRB also
recognises the necessity of gradual progress and political
compromises to overcome the current dead-lock by referencing the
letter of Eurogroup President Donohoe to the Council in December
2020 which states that
the above-described “hybrid model, relying on the existing
[national DGSs], completed by a central fund to re-insure national
systems, emerges as the most promising avenue [moving
forward]”.
As some policymakers point out, EDIS could well be, at least for
some pan-EU active deposit taking institutions, a more
cost-efficient manner for insuring eligible depositor protection
and drive cross-border deposit taking activity further while
reinforcing financial stability in the Banking Union.
The bigger picture and outlook ahead
The US banking turmoil in March 2023 has reminded markets, once
again, that even small rumours that a large institution might fail
could cause panic which can ultimately result in bank runs. It does
not take much, but when someone eventually shouts, “the
emperor has no clothes!”, confidence can quickly evaporate
throughout the entire financial system from firm to DGS. In an ever
more digitalised (banking) world, these self-defeating dynamics are
even more prone to unleashing destructive forces. Banking crises
are not complicated, in theory. They have infested our economies
for centuries, and still they occur.
The establishment of the Federal Deposit Insurance Corporation
(FDIC) in 1933 under President Roosevelt proved
quite effective in stopping bank runs in the US. The landmark step
of passing the 1933 Banking Act was arguably only made possible
after the US lost countless banks throughout the Great Depression.
At the time, the FDIC provided insurance coverage for deposits up
to USD 2,500. Today, the FDIC continues to provide deposit
insurance up to a limit of USD 250,000 – payable on the day a
bank is closed.
Introducing a truly “federal” deposit insurance scheme
as such is not as straightforward in the EU. Not least because of
the institutional architecture underpinning the Banking Union. That
is, a complex web of supranational and national authorities,
European-level framework legislation (effectively implemented by
national legislation) and a generally cautious attitude of granting
further competences to Brussels at the expense of the European
capitals, makes a realistic and politically feasible Proposal for a
EDIS a legally highly acrobatic endeavour that relies on political
will or at least compromise.
Moreover, and connected to the shortcomings of the institutional
design of the euro area is the sovereign bank nexus. Ultimately,
establishing EDIS to effectively distribute the risk associated
with protecting depositors from local bank failures to the Banking
Union as a whole could allow the bank-sovereign “doom
loop”, which has been a major cause of the European crisis in
the past few years, to be further disentangled. Although the
banking nexus has several layers of complexity, it can be further
mitigated by more targeted supervisory means of reducing banks’
holdings of their own government debt. Unfortunately
quite the opposite may still be happening in some EU Member States
today. While approximately only 4 percent of US sovereign debt is
held by US banks, the corresponding share in Germany and Italy (for
instance) is 23 and 20 percent respectively.
While Othmar Karas’ efforts on reproposing EDIS are, as at
March 2024, still “just” a Parliament Legislative
Resolution, i.e. the first step in the EU’s “ordinary
legislative procedure”, it will remain
very important for affected financial services firms and
policymakers more generally how this version of the EDIS Proposal
evolves. Almost 10 years after EDIS was first proposed, it is no
coincidence that, following the March 2023 turmoil, that in 2024,
during a time when the Banking Union celebrates its 10th
anniversary that there are efforts for EDIS 2.0. The very
renaissance of this regulatory reform also raises a number of
pertinent questions as to whether other relevant guarantee scheme
protections in the EU, in particular for the capital markets and
insurance sectors, where the EU remains behind coverage breadth and
protection levels when compared to the US and other global
financial jurisdictions, will warrant change. This is particularly
the case, albeit perhaps for a new incoming Commission after the
elections for a new Parliament in 2024, addresses the even bigger
EU priority of how to increase retail client participation in
financial markets? As shown in those other non-EU jurisdictions,
greater confidence is largely garnered by higher protection levels
and breadth of what is covered.
About us
PwC Legal is assisting a number of financial services firms and
market participants in forward planning for changes stemming from
relevant related developments. We have assembled a
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well as to proactively engage with their market stakeholders and
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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